Ryder 2nd Quarter 2013 10-Q

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
Commission File Number: 1-4364

RYDER SYSTEM, INC.
(Exact name of registrant as specified in its charter)
 
Florida
59-0739250
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
11690 N.W. 105th Street
 
Miami, Florida 33178
(305) 500-3726
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ        NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ        NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ YES   þ NO

The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at June 30, 2013 was 52,326,720.
 
 
 
 
 



RYDER SYSTEM, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
 
 
 
 
 
 
Page No.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)

 
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per share amounts)
Lease and rental revenues
$
688,048

 
675,623

 
$
1,347,756

 
1,313,481

Services revenue
707,666

 
675,533

 
1,397,127

 
1,353,885

Fuel services revenue
208,285

 
212,704

 
422,133

 
432,770

Total revenues
1,603,999

 
1,563,860

 
3,167,016

 
3,100,136

 
 
 
 
 
 
 
 
Cost of lease and rental
473,528

 
474,272

 
943,648

 
933,216

Cost of services
592,221

 
564,609

 
1,177,658

 
1,140,278

Cost of fuel services
204,626

 
209,337

 
414,919

 
424,910

Other operating expenses
33,291

 
33,664

 
71,259

 
67,913

Selling, general and administrative expenses
195,842

 
189,332

 
385,655

 
384,316

Gains on vehicle sales, net
(23,197
)
 
(22,546
)
 
(46,203
)
 
(44,537
)
Interest expense
33,901

 
35,622

 
68,355

 
70,387

Miscellaneous income, net
(3,575
)
 
(1,341
)
 
(8,145
)
 
(5,821
)
Restructuring and other charges, net
—

 
7,142

 
—

 
8,007

 
1,506,637

 
1,490,091

 
3,007,146

 
2,978,669

Earnings from continuing operations before income taxes
97,362

 
73,769

 
159,870

 
121,467

Provision for income taxes
34,787


27,002

 
56,493


39,824

Earnings from continuing operations
62,575


46,767

 
103,377


81,643

Loss from discontinued operations, net of tax
(381
)
 
(44
)
 
(1,259
)
 
(599
)
Net earnings
$
62,194

 
46,723

 
$
102,118

 
81,044

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Basic
 
 
 
 
 
 
 
Continuing operations
$
1.21

 
0.92

 
$
2.00

 
1.60

Discontinued operations
(0.01
)
 
—

 
(0.02
)
 
(0.01
)
Net earnings
$
1.20

 
0.92

 
$
1.98

 
1.59

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Diluted
 
 
 
 
 
 
 
Continuing operations
$
1.19

 
0.91

 
$
1.98

 
1.59

Discontinued operations
—

 
—

 
(0.02
)
 
(0.01
)
Net earnings
$
1.19

 
0.91

 
$
1.96

 
1.58

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.31

 
0.29

 
$
0.62

 
0.58




See accompanying notes to consolidated condensed financial statements.

1

                        
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

    
    
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Net earnings
$
62,194

 
46,723

 
$
102,118

 
81,044

 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in cumulative translation adjustment and other, before and after tax
(16,239
)
 
(16,940
)
 
(49,943
)
 
5,863

 
 
 
 
 
 
 
 
Amortization of pension and postretirement items
8,180

 
7,095

 
16,534

 
14,326

Income tax expense related to amortization of pension and postretirement items
(2,782
)
 
(2,490
)
 
(5,717
)
 
(5,033
)
Amortization of pension and postretirement items, net of taxes
5,398

 
4,605

 
10,817

 
9,293

 
 
 
 
 
 
 
 
Change in net actuarial loss
(5,762
)
 
(4,081
)
 
(5,762
)
 
(4,081
)
Income tax benefit related to change in net actuarial loss
2,048

 
1,534

 
2,048

 
1,534

Change in net actuarial loss, net of taxes
(3,714
)
 
(2,547
)
 
(3,714
)
 
(2,547
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of taxes
(14,555
)
 
(14,882
)
 
(42,840
)
 
12,609

 
 
 
 
 
 
 
 
Comprehensive income
$
47,639

 
31,841

 
$
59,278

 
93,653


See accompanying notes to consolidated condensed financial statements.




2


RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
 
 
June 30,
2013
 
December 31,
2012
 
(Dollars in thousands, except per
share amount)
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
73,429


66,392

Receivables, net
772,262


775,765

Inventories
61,672


64,146

Prepaid expenses and other current assets
154,972


133,934

Total current assets
1,062,335

 
1,040,237

Revenue earning equipment, net of accumulated depreciation of $3,485,433 and
   $3,514,910, respectively
5,987,803


5,754,608

Operating property and equipment, net of accumulated depreciation of $987,312 and
   $966,220, respectively
626,932


624,853

Goodwill
383,371


384,216

Intangible assets
75,520


80,475

Direct financing leases and other assets
424,386


434,590

Total assets
$
8,560,347


8,318,979

 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
258,697


367,975

Accounts payable
458,627


398,983

Accrued expenses and other current liabilities
479,302


505,707

Total current liabilities
1,196,626

 
1,272,665

Long-term debt
3,655,710


3,452,821

Other non-current liabilities
939,682


948,932

Deferred income taxes
1,220,970


1,177,074

Total liabilities
7,012,988

 
6,851,492

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock of no par value per share — authorized, 3,800,917; none outstanding,
   June 30, 2013 or December 31, 2012
—

 
—

Common stock of $0.50 par value per share — authorized, 400,000,000; outstanding,
   June 30, 2013 — 52,326,720; December 31, 2012 — 51,371,696
26,163

 
25,686

Additional paid-in capital
860,650

 
808,230

Retained earnings
1,291,005

 
1,221,190

Accumulated other comprehensive loss
(630,459
)
 
(587,619
)
Total shareholders’ equity
1,547,359


1,467,487

Total liabilities and shareholders’ equity
$
8,560,347


8,318,979

See accompanying notes to consolidated condensed financial statements.

3


RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)

 
Six months ended June 30,
 
2013
 
2012
 
(In thousands)
Cash flows from operating activities from continuing operations:
 
 
 
Net earnings
$
102,118

 
81,044

Less: Loss from discontinued operations, net of tax
(1,259
)
 
(599
)
Earnings from continuing operations
103,377

 
81,643

Depreciation expense
465,979

 
460,081

Gains on vehicle sales, net
(46,203
)
 
(44,537
)
Share-based compensation expense
9,602

 
9,085

Amortization expense and other non-cash charges, net
27,289

 
24,873

Deferred income tax expense
48,176

 
37,442

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
(16,591
)
 
(29,119
)
Inventories
2,089

 
2,142

Prepaid expenses and other assets
(17,392
)
 
5,723

Accounts payable
23,708

 
(11,161
)
Accrued expenses and other non-current liabilities
(36,257
)
 
(64,151
)
Net cash provided by operating activities from continuing operations
563,777

 
472,021

 
 
 
 
Cash flows from financing activities from continuing operations:
 
 
 
Net change in commercial paper borrowings
180,777


187,935

Debt proceeds
254,371


378,000

Debt repaid, including capital lease obligations
(320,862
)

(205,324
)
Dividends on common stock
(32,055
)
 
(29,656
)
Common stock issued
41,428

 
15,771

Common stock repurchased
—

 
(23,290
)
Excess tax benefits from share-based compensation
3,289

 
968

Debt issuance costs
(2,008
)
 
(2,358
)
Net cash provided by financing activities from continuing operations
124,940

 
322,046

 
 
 
 
Cash flows from investing activities from continuing operations:
 
 
 
Purchases of property and revenue earning equipment
(948,114
)
 
(1,203,985
)
Sales of revenue earning equipment
225,749

 
194,907

Sale and leaseback of revenue earning equipment
—

 
130,184

Sales of operating property and equipment
3,296

 
4,381

Acquisitions
(1,420
)
 
(2,426
)
Collections on direct finance leases
39,854

 
32,586

Changes in restricted cash
(15,142
)
 
19,306

Insurance recoveries
8,173

 
—

Net cash used in investing activities from continuing operations
(687,604
)
 
(825,047
)
 
 
 
 
Effect of exchange rate changes on cash
6,966

 
1,216

Increase (decrease) in cash and cash equivalents from continuing operations
8,079

 
(29,764
)
 
 
 
 
Cash flows from discontinued operations:
 
 
 
Operating cash flows
(1,031
)
 
(2,274
)
Effect of exchange rate changes on cash
(11
)
 
25

Decrease in cash and cash equivalents from discontinued operations
(1,042
)
 
(2,249
)
 
 
 
 
Increase (decrease) in cash and cash equivalents
7,037

 
(32,013
)
Cash and cash equivalents at January 1
66,392

 
104,572

Cash and cash equivalents at June 30
$
73,429

 
72,559

See accompanying notes to consolidated condensed financial statements.

4



RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)
 
 
Preferred
Stock
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
Amount
 
Shares
 
Par
 
 
(Dollars in thousands, except per share amount)
Balance at December 31, 2012
$
—

 
51,371,696

 
$
25,686

 
808,230

 
1,221,190

 
(587,619
)
 
1,467,487

Net earnings
—

 
—

 
—

 
—

 
102,118

 
—

 
102,118

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(42,840
)
 
(42,840
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
59,278

Common stock dividends declared — $0.62 per share
—

 
—

 
—

 
—

 
(32,303
)
 
—

 
(32,303
)
Common stock issued under employee stock option and stock purchase plans (1)
—

 
946,714

 
473

 
40,378

 
—

 
—

 
40,851

Benefit plan stock sales (2)
—

 
8,310

 
4

 
573

 
—

 
—

 
577

Share-based compensation
—

 
—

 
—

 
9,602

 
—

 
—

 
9,602

Tax benefits from share-based compensation
—

 
—

 
—

 
1,867

 
—

 
—

 
1,867

Balance at June 30, 2013
$
—

 
52,326,720

 
$
26,163

 
860,650

 
1,291,005

 
(630,459
)
 
1,547,359

————————————
(1)Net of common shares delivered as payment for the exercise price or to satisfy the option holders’ withholding tax liability upon exercise of options.
(2)Represents open-market transactions of common shares by the trustee of Ryder’s deferred compensation plans.
See accompanying notes to consolidated condensed financial statements.

5

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)


(A) INTERIM FINANCIAL STATEMENTS

The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of Ryder System, Inc. (Ryder) and all entities in which Ryder has a controlling voting interest (“subsidiaries”) and variable interest entities (VIEs) required to be consolidated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with the accounting policies described in our 2012 Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements and notes thereto. These financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included and the disclosures herein are adequate. The operating results for interim periods are unaudited and are not necessarily indicative of the results that can be expected for a full year. Prior year amounts have been reclassified to conform to the current period presentation. These reclassifications were immaterial to the financial statements taken as a whole.

(B) RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, the Financial Accounting Standards Board (FASB) issued accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward exists. Under this guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Other than the change in presentation within the Consolidated Balance Sheet, this accounting guidance will not have an impact on our consolidated financial position, results of operations or cash flows.

(C) ACQUISITIONS

Euroway Ltd. — On August 1, 2012, we acquired all of the common stock of Euroway Ltd., a U.K.-based, full service leasing, rental and maintenance company for a purchase price of $2.4 million and assumed capital lease obligations and debt of $20.3 million. Approximately $1.2 million of the stock purchase price has been paid, and the majority of the capital lease obligations have been repaid as of June 30, 2013. The purchase price includes $0.5 million in contingent consideration to be paid to the seller provided certain conditions are met. As of June 30, 2013, the fair value of the contingent consideration has been reflected in “Accrued expenses and other current liabilities” in our Consolidated Condensed Balance Sheet. See Note (N), “Fair Value Measurements,” for additional information. The acquisition included Euroway's fleet of approximately 560 full service lease vehicles as well as 800 contract maintenance vehicles. As of June 30, 2013, goodwill and customer relationship intangibles related to the Euroway acquisition were $6.5 million and $2.8 million, respectively. The combined network operates under the Ryder name, complementing our FMS business segment coverage in the U.K.

During the six months ended June 30, 2013 and June 30, 2012, we paid $1.4 million and $2.4 million, respectively, related to acquisitions completed in years prior to 2012.

(D) DISCONTINUED OPERATIONS

In 2009, we ceased SCS service operations in Brazil, Argentina, Chile and European markets. Accordingly, results of these operations, financial position and cash flows are separately reported as discontinued operations for all periods presented either in the Consolidated Condensed Financial Statements or notes thereto.

Summarized results of discontinued operations were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Pre-tax (loss) income from discontinued operations
$
(298
)
 
66

 
$
(1,199
)
 
(509
)
Income tax expense
(83
)
 
(110
)
 
(60
)
 
(90
)
Loss from discontinued operations, net of tax
$
(381
)
 
(44
)
 
$
(1,259
)
 
(599
)

Results of discontinued operations in 2013 and 2012 reflected losses related to adverse legal developments and professional and administrative fees associated with our discontinued South American operations.

6
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


The following is a summary of assets and liabilities of discontinued operations:
 
June 30,
2013
 
December 31,
2012
 
(In thousands)
Total assets, primarily deposits
$
3,621

 
4,460

Total liabilities, primarily contingent accruals
$
5,067

 
5,329


Although we discontinued our South American operations in 2009, we continue to be party to various federal, state and local legal proceedings involving labor matters, tort claims and tax assessments. We have established loss provisions for any matters where we believe a loss is probable and can be reasonably estimated. Other than with respect to the matters discussed below, for matters where a reserve has not been established and for which we believe a loss is reasonably possible, as well as for matters where a reserve has been recorded but for which an exposure to loss in excess of the amount accrued is reasonably possible, we believe that such losses will not have a material effect on our consolidated financial statements.

In Brazil, we were assessed $4.2 million (before and after tax) in prior years for various federal income taxes and social contribution taxes for the 1997 and 1998 tax years. We have successfully overturned these federal tax assessments in the lower courts; however, there is a reasonable possibility that these rulings could be reversed and we would be required to pay the assessments. We believe it is more likely than not that our position will ultimately be sustained if appealed and no amounts have been reserved for these matters. We are entitled to indemnification for a portion of any resulting liability on these federal tax claims which, if honored, would reduce the estimated loss.

In Brazil, we were assessed $4.7 million (before and after tax) in prior years for certain state operating tax credits utilized between 2001 and 2003. Although there is a reasonable possibility that we could incur this loss, we believe it is more likely than not that our position will ultimately be sustained and no amounts have been reserved for these matters.

(E) SHARE-BASED COMPENSATION PLANS

Share-based incentive awards are provided to employees under the terms of various share-based compensation plans (collectively, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors. Awards under the Plans principally include at-the-money stock options, nonvested stock and cash awards. Nonvested stock awards include grants of market-based, performance-based, and time-vested restricted stock rights. Under the terms of our Plans, dividends may be granted on our stock options, nonvested stock and cash awards. We have historically granted dividends with nonvested stock awards but not with our stock option awards. Dividends on nonvested stock granted after 2011 are not paid unless the award vests. Upon vesting, the amount of the dividends paid is equal to the aggregate dividends declared on common shares during the period from the date of grant of the award until the date the shares underlying the award are delivered.

The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Stock option and stock purchase plans
$
2,193

 
2,274

 
$
4,303

 
4,638

Nonvested stock
2,799

 
2,374

 
5,299

 
4,447

Share-based compensation expense
4,992

 
4,648

 
9,602

 
9,085

Income tax benefit
(1,640
)
 
(1,522
)
 
(3,327
)
 
(3,006
)
Share-based compensation expense, net of tax
$
3,352

 
3,126

 
$
6,275

 
6,079


During the six months ended June 30, 2013 and 2012, approximately 381,000 and 460,000 stock options, respectively, were granted under the Plans. These awards generally vest evenly over a three year period beginning on the date of grant. The stock options granted in 2013 have contractual terms of ten years and stock options granted in 2012 have contractual terms of seven years. The fair value of each option award at the date of grant was estimated using a Black-Scholes-Merton option-pricing valuation model. The weighted-average fair value per option granted during the six months ended June 30, 2013 and 2012 was $13.99 and $14.07, respectively.


7
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

During the six months ended June 30, 2013 and 2012, approximately 22,000 and 93,000 market-based restricted stock rights, respectively, were granted under the Plans. The awards were segmented into three performance periods of one, two and three years. At the end of each performance period, 25%-125% of the award may be earned based on Ryder's total shareholder return (TSR) as compared to the TSR of a peer group over the applicable performance period. For the 2013 awards, Ryder's TSR will be compared to the TSR of a custom peer group. For the 2012 awards, Ryder's TSR will be compared to the TSR of the S&P 500. If earned, employees will receive the grant of stock at the end of the relevant three year performance period provided they continue to be employed with Ryder, subject to Compensation Committee approval. The fair value of the market-based restricted stock rights was estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. The fair value of the market-based awards was determined and fixed on the grant date and considers the likelihood of Ryder achieving the market-based condition. The weighted-average fair value per market-based restricted stock right granted during the six months ended June 30, 2013 and 2012 was $53.32 and $43.39, respectively.

During the six months ended June 30, 2013, approximately 15,000 performance-based restricted stock rights were granted under the Plans. For these awards, 25%-125% of the awards may be earned based on Ryder's 2013 adjusted return on capital (ROC) measured against a ROC target. If earned, employees will receive the grant of stock three years after the grant date, provided they continue to be employed with Ryder, subject to Compensation Committee approval. Share-based compensation expense is recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. During the six months ended June 30, 2013, approximately 30,000 performance-based restricted stock rights were also awarded under the Plans for which the annual ROC target will be determined in future years. These awards will be considered granted under accounting guidance for stock compensation once the Compensation Committee approves the annual ROC target and communicates the terms of the awards to the recipients.

During the six months ended June 30, 2013 and 2012, approximately 146,000 and 123,000 time-vested restricted stock rights, respectively, were granted under the Plans. The time-vested restricted stock rights entitle the holder to shares of common stock when the awards generally vest at the end of the three-year period after the grant date. The fair value of the time-vested awards is determined and fixed on the date of grant based on Ryder’s stock price on the date of grant. The weighted-average fair value per time-vested restricted stock right granted during the six months ended June 30, 2013 and 2012 was $58.06 and $52.64, respectively.

During the six months ended June 30, 2013 and 2012, employees who received market-based restricted stock rights also received market-based cash awards. In addition, in 2012, the majority of the employees who received time-vested restricted stock rights also received market-based cash awards. The cash awards have the same vesting provisions as the market-based restricted stock rights. The cash awards are accounted for as liability awards under the share-based compensation accounting guidance as the awards are based upon the performance of our common stock and are settled in cash. As a result, the liability is adjusted to reflect fair value at the end of each reporting period. The fair value of the cash awards was estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation.

The following table is a summary of compensation expense recognized for market-based cash awards in addition to the share-based compensation expense reported in the previous table:
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Cash awards
$
889

 
788

 
$
2,163

 
1,385


Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at June 30, 2013 was $32.2 million and is expected to be recognized over a weighted-average period of 1.8 years.


8
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

(F) EARNINGS PER SHARE

We compute earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Our nonvested stock granted prior to 2012 are considered participating securities since the share-based awards contain a non-forfeitable right to dividend cash payments prior to vesting. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period.

The following table presents the calculation of basic and diluted earnings per common share from continuing operations:
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per share amounts)
Earnings per share — Basic:
 
 
 
 
 
 
 
Earnings from continuing operations
$
62,575

 
46,767

 
$
103,377

 
81,643

Less: Distributed and undistributed earnings allocated to nonvested stock
(556
)
 
(590
)
 
(978
)
 
(1,062
)
Earnings from continuing operations available to common shareholders — Basic
$
62,019

 
46,177

 
$
102,399

 
80,581

 
 
 
 
 
 
 
 
Weighted average common shares outstanding — Basic
51,445

 
50,433

 
51,201

 
50,459

 
 
 
 
 
 
 
 
Earnings from continuing operations per common share — Basic
$
1.21

 
0.92

 
$
2.00

 
1.60

 
 
 
 
 
 
 
 
Earnings per share — Diluted:
 
 
 
 
 
 
 
Earnings from continuing operations
$
62,575

 
46,767

 
$
103,377

 
81,643

Less: Distributed and undistributed earnings allocated to nonvested stock
(552
)
 
(587
)
 
(972
)
 
(1,057
)
Earnings from continuing operations available to common shareholders — Diluted
$
62,023

 
46,180

 
$
102,405

 
80,586

 
 
 
 
 
 
 
 
Weighted average common shares outstanding — Basic
51,445

 
50,433

 
51,201

 
50,459

Effect of dilutive equity awards
478

 
264

 
457

 
351

Weighted average common shares outstanding — Diluted
51,923

 
50,697

 
51,658

 
50,810

 
 
 
 
 
 
 
 
Earnings from continuing operations per common share — Diluted
$
1.19

 
0.91

 
$
1.98

 
1.59

 
 
 
 
 
 
 
 
Anti-dilutive equity awards not included above
593

 
2,414

 
1,003

 
2,044



9
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

(G) RESTRUCTURING AND OTHER CHARGES

The components of restructuring and other charges, net in the three and six months ended June 30, 2013 and 2012, respectively, were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Restructuring charges, net:
 
 
 
 
 
 
 
Severance and employee-related costs
$
—

 
7,142

 
$
—

 
7,142

Contract termination costs
—

 
—

 
—

 
865

Total
$
—

 
7,142

 
$
—

 
8,007


During the second quarter of 2012, we approved a plan to eliminate approximately 350 employees, primarily in the U.S., as a result of cost containment actions. These actions resulted in the payment of severance and other termination benefits, which have been completed. During the first half of 2012, we also recorded exit costs of $0.9 million associated with non-essential leased facilities assumed in the Hill Hire acquisition.

Activity related to restructuring reserves including discontinued operations was as follows:
 
 
 
 
 
Deductions
 
 
 
 
 
December 31, 2012
 
Additions
 
Cash
Payments
 
Non-Cash Reductions (1)
 
Foreign
Translation
Adjustments
 
June 30, 2013
 
Balance
 
 
 
 
 
Balance
 
(In thousands)      
Employee severance and benefits
$
3,147

 
—

 
2,164

 
—

 
(158
)
 
825

Contract termination costs
1,728

 
—

 
1,168

 
—

 
(99
)
 
461

Total
$
4,875

 
—

 
3,332

 
—

 
(257
)
 
1,286

_________________________ 
(1) Non-cash reductions represent adjustments to the restructuring reserve as actual costs were less than originally estimated. 

At June 30, 2013, the majority of outstanding restructuring obligations are required to be paid by the end of the year.

As mentioned in Note (U), "Segment Reporting," our primary measure of segment financial performance excludes, among other items, restructuring and other charges, net. However, the applicable portion of the restructuring and other charges, net that related to each segment for the three and six months ended June 30, 2013 and 2012, respectively, were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Fleet Management Solutions
$
—

 
5,482

 
$
—

 
6,347

Supply Chain Solutions
—

 
1,400

 
—

 
1,400

Central Support Services (CSS)
—

 
260

 
—

 
260

      Total
$
—

 
7,142

 
$
—

 
8,007



10
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(H) DIRECT FINANCING LEASE RECEIVABLES

We lease revenue earning equipment to customers for periods typically ranging from three to seven years for trucks and tractors and up to ten years for trailers. The majority of our leases are classified as operating leases. However, some of our revenue earning equipment leases are classified as direct financing leases and, to a lesser extent, sales-type leases. The net investment in direct financing and sales-type leases consisted of:
 
June 30,
2013
 
December 31,
2012
 
(In thousands)
Total minimum lease payments receivable
$
598,606

 
629,919

Less: Executory costs
(190,090
)
 
(201,777
)
Minimum lease payments receivable
408,516

 
428,142

Less: Allowance for uncollectibles
(538
)
 
(703
)
Net minimum lease payments receivable
407,978

 
427,439

Unguaranteed residuals
56,955

 
60,764

Less: Unearned income
(90,434
)
 
(96,280
)
Net investment in direct financing and sales-type leases
374,499

 
391,923

Current portion
(73,449
)
 
(76,395
)
Non-current portion
$
301,050

 
315,528


Our direct financing lease customers operate in a wide variety of industries, and we have no significant customer concentrations in any one industry. We assess credit risk for all of our customers including those who lease equipment under direct financing leases upon signing of a full service lease contract. The credit risk assessment is only updated under certain circumstances. Credit risk is assessed using an internally developed model, which is updated monthly, that incorporates credit scores from third party providers and our own custom risk ratings. The external credit scores are developed based on the customer’s historical payment patterns and an overall assessment of the likelihood of delinquent payments. Our internal ratings are weighted based on the industry in which the customer operates, company size, years in business, and other credit-related financial indicators. Any one of the following factors may result in a customer being classified as high risk: i) the customer has a history of late payments; ii) the customer has open lawsuits, liens or judgments; iii) the customer has been in business less than 3 years; and iv) the customer operates in an industry with low barriers to entry. For those customers who are designated as high risk, we typically require deposits to be paid in advance in order to mitigate our credit risk. Additionally, our receivables are collateralized by the vehicle’s fair value, which further mitigates our credit risk.

The following table presents the credit risk profile by creditworthiness category of our direct financing lease receivables:
 
June 30,
2013
 
December 31,
2012
 
(In thousands)
Very low risk to low risk
$
156,596

 
193,123

Moderate risk
184,990

 
177,400

Moderately high risk to high risk
66,930

 
57,619

 
$
408,516

 
428,142


The following table is a rollforward of the allowance for credit losses on direct financing lease receivables for the six months ended June 30, 2013 and 2012:
 
2013
 
2012
 
(In thousands)
Balance at January 1
$
703

 
903

(Credited) charged to earnings
(22
)
 
746

Deductions
(143
)
 
(911
)
Balance at June 30
$
538

 
738





11
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

(I) REVENUE EARNING EQUIPMENT

 
June 30, 2013
 
December 31, 2012
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
(In thousands)
Held for use:
 
Full service lease
$
6,826,293

 
(2,433,139
)
 
4,393,154

 
$
6,728,746

 
(2,500,786
)
 
4,227,960

Commercial rental
2,128,962

 
(686,786
)
 
1,442,176

 
2,041,698

 
(660,356
)
 
1,381,342

Held for sale
517,981

 
(365,508
)
 
152,473

 
499,074

 
(353,768
)
 
145,306

Total
$
9,473,236

 
(3,485,433
)
 
5,987,803

 
$
9,269,518

 
(3,514,910
)
 
5,754,608

 ————————————
(1)
Revenue earning equipment, net includes vehicles acquired under capital leases of $54.9 million, less accumulated depreciation of $18.3 million, at June 30, 2013, and $56.2 million, less accumulated depreciation of $16.5 million, at December 31, 2012.

At the end of 2012, we completed our annual review of residual values and useful lives of revenue earning equipment. Based on the results of our analysis, we adjusted the estimated residual values of certain classes of revenue earning equipment effective January 1, 2013. The change in estimated residual values increased pre-tax earnings for the three and six months ended June 30, 2013 by approximately $7.4 million and $14.9 million, respectively.


(J) GOODWILL

The carrying amount of goodwill attributable to each reportable business segment with changes therein was as follows:
 
Fleet
Management
Solutions
 
Supply
Chain
Solutions
 
Total
 
(In thousands)
Balance at January 1, 2013:
 
 
 
 
 
Goodwill
$
223,129

 
190,308

 
413,437

Accumulated impairment losses
(10,322
)
 
(18,899
)
 
(29,221
)
 
212,807

 
171,409

 
384,216

Purchase accounting adjustments
434

 
—

 
434

Foreign currency translation adjustments
(788
)
 
(491
)
 
(1,279
)
Balance at June 30, 2013:
 
 
 
 
 
Goodwill
222,775

 
189,817

 
412,592

Accumulated impairment losses
(10,322
)
 
(18,899
)
 
(29,221
)
 
$
212,453

 
170,918

 
383,371

 
Purchase accounting adjustments primarily related to changes in the fair value of acquired revenue earning equipment. We did not adjust the December 31, 2012 balance sheet as the amounts are not material.

We assess goodwill for impairment on April 1st of each year or more often if deemed necessary. In the second quarter of 2013, we completed our annual goodwill impairment test and determined there was no impairment.

12
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(K) ACCRUED EXPENSES AND OTHER LIABILITIES

 
June 30, 2013
 
December 31, 2012
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
(In thousands)
Salaries and wages
$
80,338

 
—

 
80,338

 
$
86,776

 
—

 
86,776

Deferred compensation
1,780

 
27,478

 
29,258

 
1,630

 
24,918

 
26,548

Pension benefits
3,279

 
586,427

 
589,706

 
3,309

 
597,275

 
600,584

Other postretirement benefits
2,670

 
36,518

 
39,188

 
2,683

 
37,916

 
40,599

Insurance obligations (1)
128,131

 
184,157

 
312,288

 
133,459

 
178,714

 
312,173

Residual value guarantees
1,485

 
239

 
1,724

 
1,505

 
130

 
1,635

Accrued rent
17,371

 
6,152

 
23,523

 
9,244

 
9,405

 
18,649

Environmental liabilities
4,361

 
7,988

 
12,349

 
4,201

 
8,415

 
12,616

Asset retirement obligations
5,372

 
15,324

 
20,696

 
3,642

 
17,116

 
20,758

Operating taxes
87,204

 
—

 
87,204

 
91,419

 
—

 
91,419

Income taxes
1,694

 
60,081

 
61,775

 
8,288

 
57,590

 
65,878

Interest
32,742

 
—

 
32,742

 
35,798

 
—

 
35,798

Deposits, mainly from customers
52,285

 
6,238

 
58,523

 
51,671

 
6,236

 
57,907

Deferred revenue
20,916

 
—

 
20,916

 
21,557

 
—

 
21,557

Acquisition holdbacks
2,815

 
—

 
2,815

 
1,637

 
2,673

 
4,310

Other
36,859

 
9,080

 
45,939

 
48,888

 
8,544

 
57,432

Total
$
479,302

 
939,682

 
1,418,984

 
$
505,707

 
948,932

 
1,454,639

————————————
(1) Insurance obligations are primarily comprised of self-insured claim liabilities.

13
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(L) INCOME TAXES

Uncertain Tax Positions

We are subject to tax audits in numerous jurisdictions in the U.S. and foreign countries. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the Internal Revenue Service (IRS) and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of our calculation of the provision for income taxes on earnings, we recognize the tax benefit from uncertain tax positions that are at least more likely than not of being sustained upon audit, based on the technical merits of the tax position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Such calculations require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. Actual results could vary materially from these estimates. We reevaluate uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, expiration of statutes of limitations, changes in tax law, effectively settled issues under audit, and new audit activity. Depending on the jurisdiction, such a change in recognition or measurement may result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

The following is a summary of tax years that are no longer subject to examination:
Federal — audits of our U.S. federal income tax returns are closed through fiscal year 2008.
State — for the majority of states, tax returns are closed through fiscal year 2008.
Foreign — we are no longer subject to foreign tax examinations by tax authorities for tax years before 2005 in Canada, 2007 in Brazil, 2008 in Mexico and 2011 in the U.K., which are our major foreign tax jurisdictions. Refer to Note (D), “Discontinued Operations,” for further discussion on various assessments related to our former South American operations.

At June 30, 2013 and December 31, 2012, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $54.1 million and $52.3 million, respectively. Unrecognized tax benefits related to federal, state and foreign tax positions may decrease by $2.3 million by June 30, 2014, if audits are completed or tax years close.

Like-Kind Exchange Program

We have a like-kind exchange program for certain of our U.S.-based revenue earning equipment. Pursuant to the program, we dispose of vehicles and acquire replacement vehicles in a form whereby tax gains on disposal of eligible vehicles are deferred. To qualify for like-kind exchange treatment, we exchange through a qualified intermediary eligible vehicles being disposed of with vehicles being acquired, allowing us to generally carryover the tax basis of the vehicles sold (“like-kind exchanges”). The program results in a material deferral of federal and state income taxes, and a decrease in cash taxes in periods when we are not in a net operating loss (NOL) position. As part of the program, the proceeds from the sale of eligible vehicles are restricted for the acquisition of replacement vehicles and other specified applications. Due to the structure utilized to facilitate the like-kind exchanges, the qualified intermediary that holds the proceeds from the sales of eligible vehicles and the entity that holds the vehicles to be acquired under the program are required to be consolidated in the accompanying Consolidated Condensed Financial Statements in accordance with U.S. GAAP. The total assets, primarily revenue earning equipment, and the total liabilities, primarily vehicle accounts payable, held by these consolidated entities are equal in value as these entities are solely structured to facilitate the like-kind exchanges. At June 30, 2013 and December 31, 2012, these consolidated entities had total assets and total liabilities of $181.2 million and $25.8 million, respectively.

In the second quarter of 2012, we began to restructure and centralize the administration of vehicle purchasing, licensing and sales in order to reduce vehicle acquisition costs as well as realize operational efficiencies. During 2012, we were in a NOL position for tax purposes and were not realizing any benefits from the like-kind exchange program. As a result, effective April 1, 2012, we temporarily suspended the like-kind exchange program. Once we suspended the program, tax gains on vehicles sold during that period were no longer deferred. Those tax gains resulted in an immaterial decrease in the NOL. Although the suspension did not impact our 2012 tax provision or capital spending program, our cash flows increased $19.2 million from the release of the program's restricted cash.

In the first quarter of 2013, once we had completed our restructuring of the administrative processes for purchasing and selling vehicles, we reinstated our like-kind exchange program. The reinstated program operates, and will provide cash tax

14
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

benefits, in the same manner as it did prior to suspension once we are no longer in a NOL position. Our cash flow declined $15.1 million as a result of the program's restricted cash. There were no other impacts to cash flow as a result of the program's reinstatement.

Effective Tax Rate

Our effective income tax rate from continuing operations for the second quarter of 2013 was 35.7% compared with 36.6% in the same period of the prior year. The decrease in our effective tax rate in the second quarter of 2013 is due to a higher proportionate amount of 2013 earnings in lower tax rate jurisdictions as well as the impact of a prior year tax law change.

Our effective income tax rate from continuing operations for the six months ended June 30, 2013 was 35.3% compared with 32.8% in the same period of the prior year. The effective rate from continuing operations in the first half of 2012 was favorably impacted by a tax benefit of $5.0 million (4.1% of earnings before tax) relating to the favorable resolution of a tax item from prior periods. The increase in the effective tax rate in the first half of 2013 reflects the $5.0 million tax benefit in the prior year partially offset by a higher proportionate amount of 2013 earnings in lower tax rate jurisdictions.


(M) DEBT
 
Weighted-Average
Interest Rate
 
 
 
 
 
 
 
June 30,
2013
 
December 31,
2012
 
Maturities
 
June 30,
2013
 
December 31,
2012
 
 
 
 
 
 
 
(In thousands)
Short-term debt and current portion of long-term debt:
 
 
 
 
 
 
 
 
 
Short-term debt
1.33%
 
2.27%
 
2013
 
$
394

 
9,820

Current portion of long-term debt, including capital leases
 
 
 
 
 
 
258,303

 
358,155

Total short-term debt and current portion of long-term debt
 
 
 
 
 
 
258,697

 
367,975

Long-term debt:
 
 
 
 
 
 
 
 
 
U.S. commercial paper (1)
0.31%
 
0.41%
 
2016
 
531,922

 
329,925

Canadian commercial paper (1)
1.10%
 
1.14%
 
2016
 
1,901

 
23,165

Global revolving credit facility
1.57%
 
1.58%
 
2016
 
5,063

 
8,924

Unsecured U.S. notes — Medium-term notes (1)
3.95%
 
4.01%
 
2014-2025
 
2,971,712

 
2,971,313

Unsecured U.S. obligations, principally bank term loans
1.48%
 
1.56%
 
2015-2019
 
55,500

 
105,500

Unsecured foreign obligations
1.91%
 
1.91%
 
2014-2016
 
293,768

 
313,406

Capital lease obligations
4.00%
 
4.08%
 
2013-2019
 
43,789

 
42,018

Total before fair market value adjustment
 
 
 
 
 
 
3,903,655

 
3,794,251

Fair market value adjustment on notes subject to hedging (2)
 
 
 
 
 
10,358

 
16,725

 
 
 
 
 
 
 
3,914,013

 
3,810,976

Current portion of long-term debt, including capital leases
 
 
 
 
 
 
(258,303
)
 
(358,155
)
Long-term debt
 
 
 
 
 
 
3,655,710

 
3,452,821

Total debt
 
 
 
 
 
 
$
3,914,407

 
3,820,796

 ————————————
(1)
We had unamortized original issue discounts of $8.4 million and $8.8 million at June 30, 2013 and December 31, 2012, respectively.
(2)
The notional amount of executed interest rate swaps designated as fair value hedges was $300 million and $550 million at June 30, 2013 and December 31, 2012, respectively.

We can borrow up to $900 million under a global revolving credit facility with a syndicate of twelve lending institutions led by Bank of America N.A., Bank of Tokyo-Mitsubishi UFJ, Ltd., BNP Paribas, Mizuho Corporate Bank, Ltd., Royal Bank of Canada, Royal Bank of Scotland Plc, U.S. Bank National Association and Wells Fargo Bank, N.A. This facility matures in June 2016 and is used primarily to finance working capital and provide support for the issuance of unsecured commercial paper in the U.S. and Canada. This facility can also be used to issue up to $75 million in letters of credit (there were no letters of credit outstanding against the facility at June 30, 2013). At our option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The agreement provides for annual facility fees, which range from 10.0 basis points to 32.5 basis points, and are based on Ryder’s long-term credit ratings. The current annual facility fee is 15.0

15
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

basis points, which applies to the total facility size of $900 million. The credit facility contains no provisions limiting its availability in the event of a material adverse change to Ryder’s business operations; however, the credit facility does contain standard representations and warranties, events of default, cross-default provisions and certain affirmative and negative covenants. In order to maintain availability of funding, we must maintain a ratio of debt to consolidated net worth of less than or equal to 300%. Net worth, as defined in the credit facility, represents shareholders' equity excluding any accumulated other comprehensive income or loss associated with our pension and other postretirement plans. The ratio at June 30, 2013 was 179%. At June 30, 2013, $361 million was available under the credit facility, net of support for commercial paper borrowings.

Our global revolving credit facility permits us to refinance short-term commercial paper obligations on a long-term basis. Settlement of short-term commercial paper obligations not expected to require the use of working capital are classified as long-term as we have both the intent and ability to refinance on a long-term basis. At June 30, 2013 and December 31, 2012, we classified $533.8 million and $353.1 million, respectively, of short-term commercial paper as long-term debt.

In February 2013, we issued $250 million of unsecured medium-term notes maturing in February 2019. The proceeds from the notes were used to pay down commercial paper and for general corporate purposes. If the notes are downgraded following, and as a result of, a change in control, the note holder can require us to repurchase all or a portion of the notes at a purchase price equal to 101% of principal plus accrued and unpaid interest.

We have a trade receivables purchase and sale program, pursuant to which we sell certain of our domestic trade accounts receivable to a bankruptcy remote, consolidated subsidiary of Ryder, that in turn sells, on a revolving basis, an ownership interest in certain of these accounts receivable to a receivables conduit or committed purchasers. The subsidiary is considered a VIE and is consolidated based on our control of the entity’s activities. We use this program to provide additional liquidity to fund our operations, particularly when it is cost effective to do so. The costs under the program may vary based on changes in interest rates. The available proceeds that may be received under the program are limited to $175 million. If no event occurs which causes early termination, the 364-day program will expire on October 25, 2013. The program contains provisions restricting its availability in the event of a material adverse change to our business operations or the collectibility of the collateralized receivables. At June 30, 2013 and December 31, 2012, no amounts were outstanding under the program. Sales of receivables under this program will be accounted for as secured borrowings based on our continuing involvement in the transferred assets.

At June 30, 2013 and December 31, 2012, we had letters of credit and surety bonds outstanding totaling $296.6 million and $294.1 million, respectively, which primarily guarantee the payment of insurance claims.


16
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(N) FAIR VALUE MEASUREMENTS

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and the levels of inputs used to measure fair value:
 
Balance Sheet Location
 
Fair Value Measurements
At June 30, 2013 Using
 
Total
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
(In thousands)
Assets:
 
 
 
Interest rate swaps
DFL and other assets
 
$
—

 
10,358

 
—

 
10,358

Investments held in Rabbi Trusts:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
4,149

 
—

 
—

 
4,149

U.S. equity mutual funds
 
 
13,094

 
—

 
—

 
13,094

Foreign equity mutual funds
 
 
3,417

 
—

 
—

 
3,417

Fixed income mutual funds
 
 
4,515

 
—

 
—

 
4,515

Investments held in Rabbi Trusts
DFL and other assets
 
25,175

 
—

 
—

 
25,175

Total assets at fair value
 
 
$
25,175

 
10,358

 
—

 
35,533

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Contingent consideration
Accrued expenses and other current liabilities
 
$
—

 
—

 
478

 
478

Total liabilities at fair value
 
 
$
—

 
—

 
478

 
478

 
Balance Sheet Location
 
Fair Value Measurements
At December 31, 2012 Using
 
Total
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
(In thousands)
Assets:
 
 
 
Interest rate swaps
Prepaid expenses and other current assets
 
$
—

 
1,313

 
—

 
1,313

Interest rate swaps
DFL and other assets
 
—

 
15,412

 
—

 
15,412

Investments held in Rabbi Trusts:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
4,055

 
—

 
—

 
4,055

U.S. equity mutual funds
 
 
10,871

 
—

 
—

 
10,871

Foreign equity mutual funds
 
 
2,974

 
—

 
—

 
2,974

Fixed income mutual funds
 
 
4,526

 
—

 
—

 
4,526

Investments held in Rabbi Trusts
DFL and other assets
 
22,426

 
—

 
—

 
22,426

Total assets at fair value
 
 
$
22,426

 
16,725

 
—

 
39,151

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Contingent consideration
Other non-current liabilities
 
$
—

 
—

 
478

 
478

Total liabilities at fair value
 
 
$
—

 
—

 
478

 
478


The following is a description of the valuation methodologies used for these items, as well as the level of inputs used to measure fair value:

Interest rate swaps — The derivatives are pay-variable, receive-fixed interest rate swaps based on the LIBOR rate and are designated as fair value hedges. Fair value was based on a model-driven income approach using the LIBOR rate at each interest payment date, which was observable at commonly quoted intervals for the full term of the swaps. Therefore, our interest rate swaps were classified within Level 2 of the fair value hierarchy.

Investments held in Rabbi Trusts — The investments primarily include mutual funds that invest in equity and fixed income securities. Shares of mutual funds were valued based on quoted market prices, which represent the net asset value of the shares and were therefore classified within Level 1 of the fair value hierarchy.

17
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

Contingent consideration — Fair value was based on the income approach and uses significant inputs that are not observable in the market. These inputs are based on our expectations as to what amount we will pay based on contractual provisions. Therefore, the liability was classified within Level 3 of the fair value hierarchy.

The following tables present our assets and liabilities that are measured at fair value on a nonrecurring basis and the levels of inputs used to measure fair value:
 
Fair Value Measurements
At June 30, 2013 Using
 
Total Losses (2)
 
Level 1
 
Level 2
 
Level 3
 
Three months  ended
 
Six months ended
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
 
 
 
Revenue earning equipment: (1)
 
 
 
 
 
 
 
 
 
Trucks
$
—

 
—

 
11,132

 
$
2,447

 
$
5,476

Tractors
—

 
—

 
16,283

 
1,413

 
2,508

Trailers
—

 
—

 
882

 
370

 
967

Total assets at fair value
$
—

 
—

 
28,297

 
$
4,230

 
$
8,951

 
 
Fair Value Measurements
At June 30, 2012 Using
 
Total Losses (2)
 
Level 1
 
Level 2
 
Level 3
 
Three months
 ended
 
Six months ended
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
 
 
 
Revenue earning equipment (1)
 
 
 
 
 
 
 
 
 
Trucks
$
—

 
—

 
9,992

 
$
3,108

 
$
5,489

Tractors
—

 
—

 
6,361

 
1,071

 
1,542

Trailers
—

 
—

 
584

 
276

 
783

Total assets at fair value
$
—

 
—

 
16,937

 
$
4,455

 
$
7,814

 ————————————
(1)
Represents the portion of all revenue earning equipment held for sale that is recorded at fair value, less costs to sell.
(2)
Total losses represent fair value adjustments for all vehicles held for sale throughout the period for which fair value was less than carrying value.

Revenue earning equipment held for sale is stated at the lower of carrying amount or fair value less costs to sell. Losses to reflect changes in fair value are presented within “Other operating expenses” in the Consolidated Condensed Statements of Earnings. For revenue earning equipment held for sale, we stratify our fleet by vehicle type (tractors, trucks and trailers), weight class, age and other relevant characteristics and create classes of similar assets for analysis purposes. Fair value was determined based upon recent market prices obtained from our own sales experience for sales of each class of similar assets and vehicle condition. Therefore, our revenue earning equipment held for sale was classified within Level 3 of the fair value hierarchy.

Fair value of total debt (excluding capital lease obligations) at June 30, 2013 and December 31, 2012 was approximately $4.00 billion and $3.99 billion, respectively. For publicly-traded debt, estimates of fair value were based on market prices. Since our publicly-traded debt is not actively traded, the fair value measurement was classified within Level 2 of the fair value hierarchy. For other debt, fair value was estimated based on a model-driven approach using rates currently available to us for debt with similar terms and remaining maturities. Therefore, the fair value measurement of our other debt was classified within Level 2 of the fair value hierarchy. The carrying amounts reported in the Consolidated Condensed Balance Sheets for “Cash and cash equivalents,” “Receivables, net” and “Accounts payable” approximate fair value because of the immediate or short-term maturities of these financial instruments.


18
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(O) DERIVATIVES

As of June 30, 2013, we have interest rate swaps outstanding which are designated as fair value hedges whereby we receive fixed interest rate payments in exchange for making variable interest rate payments. The differential to be paid or received is accrued and recognized as interest expense. The following table provides a detail of the swaps outstanding and the related hedged items as of June 30, 2013:
 
 
 
Maturity date
 
Face value of medium-term notes
 
Aggregate 
notional
amount of interest rate swaps
 
Fixed interest 
rate
 
Weighted-average variable
interest rate on hedged debt
as of June 30,
Issuance date
 
 
 
 
 
2013
 
2012
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
May 2011
 
June 2017
 
$350,000
 
$150,000
 
3.50%
 
1.51%
 
1.83%
February 2011
 
March 2015
 
$350,000
 
$150,000
 
3.15%
 
1.41%
 
1.70%

Changes in the fair value of our interest rate swaps are offset by changes in the fair value of the debt instrument. Accordingly, there is no ineffectiveness related to the interest rate swaps. The location and amount of gains (losses) on interest rate swap agreements designated as fair value hedges and related hedged items reported in the Consolidated Condensed Statements of Earnings were as follows:
Fair Value Hedging Relationship
 
Location of
 Gain (Loss)
Recognized in Income
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
(In thousands)
Derivatives: Interest rate swaps
 
Interest expense
 
$
(3,586
)
 
218

 
$
(6,367
)
 
(1,952
)
Hedged items: Fixed-rate debt
 
Interest expense
 
3,586

 
(218
)
 
6,367

 
1,952

Total
 
 
 
$
—

 
—

 
$
—

 
—


Refer to Note (N), “Fair Value Measurements,” for disclosures of the fair value and line item caption of derivative instruments recorded on the Consolidated Condensed Balance Sheets.

(P) SHARE REPURCHASE PROGRAMS

In December 2011, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our various employee stock, stock option and employee stock purchase plans. Under the December 2011 program, management is authorized to repurchase shares of common stock in an amount not to exceed the number of shares issued to employees under the Company's various employee stock, stock option and employee stock purchase plans from December 1, 2011 through December 13, 2013. The December 2011 program limits aggregate share repurchases to no more than 2 million shares of Ryder common stock. In 2013, we temporarily paused our anti-dilutive share repurchase program to appropriately manage our leverage and to allow us to maintain near-term balance sheet flexibility. For the three months ended June 30, 2012, we repurchased and retired 233,500 shares under the program at an aggregate cost of $10.9 million. For the six months ended June 30, 2012, we repurchased and retired 456,700 shares under the program at an aggregate cost of $22.9 million.

19
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(Q) ACCUMULATED OTHER COMPREHENSIVE LOSS

The following summaries set forth the components of accumulated other comprehensive loss, net of tax:
 
 
 
Currency
Translation
Adjustments
 
Net Actuarial
Loss (1)
 
Prior Service
Credit (1)
 
Transition
Obligation (1)
 
Unrealized
Gain (Loss)
on  Derivatives
 
Accumulated
Other
Comprehensive
Loss
 
 
(In thousands)
December 31, 2012
 
$
57,848

 
(648,125
)
 
2,634

 
12

 
12

 
(587,619
)
Amortization
 
—

 
11,514

 
(697
)
 
—

 
—

 
10,817

Current period change
 
(49,952
)
 
(3,714
)
 
—

 
—

 
9

 
(53,657
)
June 30, 2013
 
$
7,896

 
(640,325
)
 
1,937

 
12

 
21

 
(630,459
)

 
 
Currency
Translation
Adjustments
 
Net Actuarial
Loss (1)
 
Prior Service
Credit (1)
 
Transition
Obligation (1)
 
Unrealized
Gain (Loss)
on  Derivatives
 
Accumulated
Other
Comprehensive
Loss
 
 
(In thousands)
December 31, 2011
 
$
28,219

 
(599,687
)
 
4,291

 
12

 
—

 
(567,165
)
Amortization
 
—

 
10,107

 
(814
)
 
—

 
—

 
9,293

Current period change
 
5,844

 
(2,547
)
 
—

 
—

 
19

 
3,316

June 30, 2012
 
$
34,063

 
(592,127
)
 
3,477

 
12

 
19

 
(554,556
)
_______________________ 
(1)
These amounts are included in the computation of net periodic pension cost. See Note (R), "Employee Benefit Plans", for further information.


The loss from currency translation adjustments in 2013 of $50.0 million was due to the weakening of the British Pound and the Canadian Dollar compared to the U.S. Dollar. The currency translation adjustment in 2012 of $5.8 million reflects the strengthening of the British Pound against the U.S. Dollar.




20
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

(R) EMPLOYEE BENEFIT PLANS

Components of net periodic benefit cost were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Pension Benefits
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
Service cost
$
3,756

 
3,826

 
$
8,008

 
7,733

Interest cost
22,316

 
23,563

 
44,735

 
47,252

Expected return on plan assets
(26,389
)
 
(24,055
)
 
(52,837
)
 
(48,112
)
Amortization of:
 
 
 
 
 
 
 
Net actuarial loss
8,685

 
7,726

 
17,565

 
15,587

Prior service credit
(443
)
 
(567
)
 
(909
)
 
(1,136
)
 
7,925

 
10,493

 
16,562

 
21,324

Union-administered plans
2,046

 
1,630

 
4,030

 
3,244

Net periodic benefit cost
$
9,971

 
12,123

 
$
20,592

 
24,568